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The price hike debate

The retail industry has demonstrated a tough front in the face of escalating food costs worldwide.

By Administrator

Thu 08 May 2008 04:00 AM

Retail News investigates how FMCG retailers, manufacturers and suppliers are battling inflation across the Middle East.

The retail industry has demonstrated an incredibly tough front in the face of escalating food costs, however the situation has also raised concern about the plight of independents and small players in the Middle East.

In recent weeks, retail giants Carrefour, Union Coop and Lulu Hypermarket Group have signed MoUs with the UAE's Ministry of Economy to maintain 2007 prices on a plethora of basic commodities.

Carrefour revealed its intention to fix the prices of 52 basic food items including rice, eggs, milk, tomato paste, sugar, salt, vegetable oil and flour at its hypermarkets in the UAE.

The Government rushed swiftly to the aid of Lulu Hypermarket Group, to kickstart the first phase of a program to fix prices of 32 goods at 2007 levels - as the UAE's Minister of Economy H.E. Sultan bin Saeed Al Mansouri praised the "vital role that the private sector can play in contributing to price stability - after yet another agreement with the Union Cooperative Society in Dubai to hold prices of 16 basic goods at 2007 levels throughout this year.

Meanwhile, H.E. Mohammed Bin Abdul Aziz Al Shihhi, undersecretary of the UAE's Ministry of Economy gallantly called for the development of "competitive markets that are free of monopolies and illegal practices, and where quality, safety and competitive prices prevail.

When questioned on how he will reconcile freezing prices with business objectives, Yusuffali MA, managing director of Lulu Hypermarkets says the chain is "fully aware of the huge financial burden this decision will have on our bottom line, but at the same time we are also fully aware of our commitment towards Government policies and residents of the UAE in times of need.

Aside from its "small gesture," products will also be sold at cost price and even below cost, he reveals. "The only hitch we are facing is the non-availability of some products, especially rice.

Though we have enough stock, we are in the process of discussing this issue with officials from the Indian Government to ease the ban imposed on the export of rice.

Such positive moves would be enough to make one weep with joy at the seemingly effortless survival for an industry purportedly in the grip of a crisis, however as the director of T. Choithram & Sons Manoj Thanwani observes, the battle for independents has just started.

"The multiples are able to secure themselves for the forthcoming months, but this will not be the case for the independent grocers. They are going to have to absorb the price increases, without a doubt.

"The Government not involved in securing commodities. They should be pre-booking products and sustaining prices of commodities, yet that is not happening," he argues.Mohammed Samir, vice president, Procter & Gamble, Near East, Egypt urges more manufacturers to "localise supplies," as "the whole cycle needs to be a positive one.

In Egypt's "very different retail environment," Samir plans to bring in more local supplies, currently representing up to half of P&G raw materials for the country's operation.

"We are hearing about more international players coming into the market, but Egypt now has more than 350,000 small stores. Even the local raw materials are going up in price, but compared to international levels they are lower.

"If it costs 20-30% more for basic food items, where will that money come from for the independents?" he asks, and proceeds to reveal plans to offer smaller packs in a market "concentrated on smaller stores rather than hypermarkets.

Global crop shortages and reduced yields alongside rising demand have doubled the prices of commodities including poultry, dairy and oil categories, according to Choithram's Thanwani, who questions the recent deals between the Ministry of Economy and major retailers: "Is the Ministry subsidising them? In which case, why are they not subsiding all of the retailers?"

In Egypt, the price of bread has increased five-fold in private bakeries and the staple food has become unaffordable for 20% of the 76-million strong population, creating panic that the staple may run out and in turn scuffles in bread queues, violent clashes and deaths, according to police.

Food prices have almost doubled in Yemen in the past four months, sparking further demonstrations and riots.

Industry players are currently faced by two choices, Thanwani says, "either do not stock the product, or stock and work on a reasonable margin as all other retailers are currently doing, without any local government subsidies.

"The weak US dollar, to which the UAE dirham is pegged, is again another key factor leading to rising commodity costs especially when the food items imported are from all countries excluding the US," he observes.

Importers are confronted by importation duties of 5% on commodities such as frozen poultry, alongside global shortages and bird flu leading to steep price increases on poultry and eggs.

"A retailer has to constantly provide the service of availability. This means that we are forced to purchase products and sell with a nominal margin as is currently done.

At no stage can a retailer sell at loss and the same has been re-enforced by the distributors of the premium brands of rice, eggs and poultry. Concerted efforts to counter soaring costs

Retailers in the UAE have demonstrated their resilience by joining forces with the Government for inflation-beating initiatives.

Carrefour: Undersecretary H.E. Mohammed Bin Abdul Aziz Al Shihhi from the UAE's Ministry of Economy signed a Memorandum of Understanding last month with Carrefour's senior vice president to maintain the 2007 prices for some basic food commodoties this year.

The move is part of a series of initiatives to implement the first phase of a program, which will see Carrefour keep the 2007 prices of up to 52 prime commodities at its hypermarkets in the UAE.

According to the agreement, Carrefour will fix prices of 52 basic food commodities at 2007 price levels. The goods include four types of rice, three types of egg, three types of milk, four types of frozen chicken, two types of meat, two types of tomato paste, and three types of sugar.

Emke Group: The Ministry has entered the first phase of a program to fix prices of 32 goods at 2007 levels, on the heels of another agreement with the Union Cooperative Society in Dubai to fix prices of 16 basic goods at 2007 levels throughout 2008, including oil, rice, flour, eggs, sugar, powdered milk, tea, meat, chicken, fish and bread.

The distributor: Direct import won't work

Food prices are shooting up, particularly for commodities including oil, sugar and rice, and this will affect all of the consumer products, according to Albert Abu Diwan, managing director of Al Aqili Distribution.

"As distributors, we are partners with retailers so we negotiate with suppliers and principals on their behalf. Distributors have an important role to play in fighting inflation," he says. The Municipality's drive to ramp up direct imports will actually raise prices, he believes.

"The cost of receiving products will be higher, unlike working with companies like ours. On commodities, maybe they can import and save, but on branded products it doesn't work.

The retailer: government should secure staples

Companies are saying they will keep prices down but to what level can they do that, asks Manoj Thanwani, director of Dubai-based retail chain T. Choithram & Sons.They would need to subsidise it out of their own costs. Is the Ministry subsidising them?" Freight rates have increased fourfold within 15 months, according to Thanwani.

The key factor for this rising cost is fuel and a quantum leap in demand for containers, which shipping lines are unable to fulfil globally."

Global outsourcing and self-sufficiency for a majority of products has enabled Choithram to provide its customers to provide "variety, good pricing, availability, quality and service.

Thanwani adds, "we are still in a position for now to provide the consumers with product availability at existing prices, however the question does arise if it would be a continuous process.

"Having our own network in 27 countries enables us to source products at far more competitive pricing compared to goods available in the local industry, however this means that as a group we take measures to spot purchase commodities at prices which our suitable for our market and ensuring availability for at least a minimum period of 120 days.

He admits to Retail News that cost hikes in recent month have presented the greatest challenge to date during his reign as VP as the sale prices of products in Egypt are already lower than other Middle East markets, and he says "the whole cycle needs to be a positive one.

How can companies be positive about rising costs? By driving innovation, he says, bringing in more local supplies, which already represents half of the operation's raw materials. "Even the local raw materials are going up in price, but compared to international levels they are lower.

The biggest effort needs to go around making sure the consumer is boss, and finding out what that they think they really should pay.

The Egyptian retail market is concentrated on small supermarkets and independents, which has pushed P&G to "offer them the choice of buying smaller packs, we will see more of that in the future.

Consumers like smaller stores for shopping and bigger stores for entertainment. They are attracted to personalised service and home delivery which multiples fail to offer. RELATED LINKS:Fruitful bickering over basics